Partially, yes, it’s Lorenzo-esque in some ways. It’s especially convenient that NW just reported a 4.x Billion loss as well….

However, most of the losses for DL are due to a one-time writeoff of “goodwill” – which I believe was added in order to fluff Delta’s value to over $10 Billion so that they could convince investors to reject US Airways’ $9 Billion buyout offer.

Goodwill is created when you pay more for something than it’s fair market value. In theory goodwill represents the present value of future earnings that will be generated by the overpayment at the time of acquisition. Think of it this way, the buyer believes that the market value for an asset understates its true long-term value. They pay a premium for the asset (generate the goodwill on the balance sheet) and expect that this goodwill create a return in excess of the asset’s value in subsequent periods.

In order to buy the asset either cash or equity was used. At some point (yearly now under the current GAAP rules) a company must evaluate the value of its goodwill and compare it to the NPV of the future cash flows that the asset is expected to generate. If the NPV of the asset acquired is less than the value of the goodwill, the goodwill is written down. This is essentially an admission that you overpaid for the asset in the first place.

So when people say that goodwill is a non-cash charge, they’re only really telling half the story. Yes it’s non-cash in the current period, but you did expend cash (or dilute your stockholders) in a prior period and they are now worse off for that.

For illustrative purposes, let’s say you bought the patent for buggy whips in the late 1800’s. At that point the market valued that patent at $1. You thought to yourself, I know that the population of the country is growing and therefore more people will be buying buggies. I’ll offer $5 for the patent close the deal quickly and make a ton of money in future years. You buy the patent from the seller, record a $1 asset (the patent), create $4 of goodwill and pay $5 of cash.

Eventually in 1950, you realize that the value of the patent is declining because people are buying cars not buggies and eventually the market for buggies will disappear. So you write down the value of the goodwill to zero. Have you expended cash in 1950? No. But are you worse off for having spent $5 for something worth $1 (or less) in 1890? Yes.

Management likes to report goodwill because they don’t suffer any negative effect when they create it and when the decision is demonstrated to be wrong years down the road, they report the loss as non-cash and expect investors to ignore it. But by writing down the asset, the company admits that it made a poor decision in a prior period and that shareholders lost value.